Draghi praises Spain's efforts to cut deficit

Published 11:36 AM ET Sun, 11 Nov 2012
The Associated Press

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FRANKFURT, Germany -- European Central Bank President Mario Draghi is praising Spain's efforts to get its deficit under control and said conditions the country would need to meet to get help with its borrowing costs "don't need to be punitive."

The ECB has said it could buy countries' bonds on the secondary market, lowering their interest rates _ if governments agree with the other 16 countries that use the euro on steps to improve their finances.

Spain's Prime Minister Mariano Rajoy is holding off asking for help out of concern that Spain may be slapped with harsh austerity conditions from the eurozone.

The ECB chief said at a news conference Thursday that "signficant progress has taken place" in Spain, adding that a number of measures had been "announced, legislated, and implemented" in only a short period of time.

Draghi made the remarks at his news conference after the ECB left its benchmark interest rate at a record low of 0.75 percent.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

The European Central Bank has left its key interest rate unchanged at a record low of 0.75 percent, holding off on providing further stimulus to the lagging economies of the 17 countries that use the euro currency.

The bank's governing council made the decision Thursday at a meeting in Brdo Pri Kranju, Slovenia.

A rate cut could in theory provide a boost for the eurozone's economy. But rates are already low, and bank officials have questioned how much a further cut would help right now.

Additionally, inflation has remained stubbornly above the bank's goal of just under 2 percent, coming in at an annual 2.7 percent in September due to oil prices and higher taxes in some countries. That is also grounds for caution in cutting rates further, since low rates can sometimes worsen inflation.

The Bank of England also kept its key interest rate unchanged at a record low 0.5 percent.

Markets across Europe were broadly unchanged following the rate decision with the Stoxx 50 index of leading European shares rising one point following the announcement to 2,543. The euro was also steady against the dollar at $1.2952.

Attention was expected to shift to the ECB President Mario Draghi's news conference. The bank has already taken steps to bolster the eurozone during its crisis over too much government debt. At last month's meeting, it said it could buy unlimited amounts of short-term bonds issued by countries with heavy debts _ such as Spain and Italy _ so long as they took steps to reduce their deficits. Such bond purchases would lower the interest rates countries pay when they sell new bonds _ which they must constantly do in order to pay off old bonds.

The lower rates would save governments money and help convince bond investors they will be able to keep paying off their debt.

So far the other eurozone countries have had to bail out three small countries _ Greece, Ireland and Portugal _ with rescue loans along with the International Monetary Fund. Leaders are now trying to support Spain and Italy, which are much larger. A full scale bailout for both would stretch the resources of the other countries.

At his news conference, Draghi was expected to underline that Spain needs to agree to strict conditions before it can get that help. The ECB has stressed that countries must first apply for financial help from the eurozone bailout fund, the European Stability Mechanism, and agree to a list of steps to reduce their deficits.

Spain's Prime Minister Mariano Rajoy has held off applying, apparently concerned that surrendering that much authority over his country's finances would be politically unpopular.

Rajoy's delay has started to unnerve financial markets that relaxed after the ECB announced the bond purchase plans. Interest rates on short-term Spanish debt have risen.

Draghi will also be questioned about his outlook for the eurozone's troubled economy. Lack of growth is a key obstacle to efforts to end the debt crisis because growth makes a country's debt burden smaller relative to the size of the overall economy.

The eurozone shrank 0.2 percent in the second quarter and is in danger of shrinking again in the third quarter. A recession is typically defined as two straight quarters of economic contraction. Unemployment is at 11.4 percent, the highest since the shared euro currency was introduced by the European Union in 1999.